Federal courts are seeing a new wave of Employee Retirement Income Security Act (ERISA) suits based on university health plans that allegedly directed plan participants toward university-affiliated providers without appropriate transparency. Current litigation is pending involving Northwestern University and the University of Rochester, both of which utilize tiered network arrangements. According to the plaintiffs’ claims, these arrangements result in much higher costs for plan participants who seek care outside the preferred affiliated network.
Issues in these cases involve whether plan participants received adequate disclosure of the arrangements and if the universities went beyond plan design into fiduciary actions driven by institutional financial interests. These cases are indicative of the larger trend in ERISA litigation over health plans.
Disclosure Duties in Tiered Network Arrangements
Under ERISA, plan administrators must provide participants with a summary plan description (SPD) that is understandable to the average participant and comprehensive enough to disclose material plan terms, as well as the participant’s rights and duties. In the context of group health plans, material plan terms include coverage terms, cost-sharing features, and benefit limitations. Additionally, under the Affordable Care Act (ACA), plan administrators must disclose a summary of benefits and coverage (SBC).
A tiered network arrangement may impose additional disclosure requirements. Due to the complexity of these arrangements, participants may receive SPDs and SBCs and still not understand which providers are preferred, the costs of non-preferred care, or how difficult this structure can be to access care. Therefore, plans with a tiered network structure may have an enhanced duty to clearly communicate with plan participants so that they understand how to avoid potentially higher out-of-pocket costs.
Understanding Tiered Network Disputes
Universities often defend tiered network arrangements as effective mechanisms for controlling healthcare costs. Although these arrangements may promote higher-value providers, create leverage in contract negotiations, and reduce overall expenses, they also may favor providers affiliated with the plan sponsor, which may be inappropriate. If plan participants face higher out-of-pocket costs or fewer options for choosing non-affiliated providers, and if that structure is unclear, universities’ actions may appear entirely self-interested rather than beneficial to plan participants, inconsistent with fiduciary duties. These arrangements may lead to claims against universities centering on failure to clearly disclose the tiered network arrangement, the financial implications of using non-preferred providers, and the role of university-affiliated providers in the structure.
In defending themselves, universities in this situation typically rely on the settlor-function doctrine. The U.S. Supreme Court has held that employers have no fiduciary duties under ERISA in plan design activities such as creation, benefit inclusion, and benefit structure. As a result, a court could find that a university’s decision to implement a tiered network structure is a settlor function and thus not subject to fiduciary constraints.
Nonetheless, the settlor-function defense is not necessarily the end of litigation in these cases. Fiduciary duties still apply to the implementation, administration, monitoring, and dissemination of information to plan participants. Plan sponsors can adopt a tiered network arrangement. However, they may still risk liability due to a failure to explain the model properly or accurately, a lack of transparency about the basis for tier assignments, disregard for evidence of participant harm, or institutional conflicts that unfairly drive plan administration. The focus in these disputes is not the university’s choice to implement a tiered network arrangement, but rather how it disclosed, monitored, and managed it.
Disputes may also arise because of conflicts between fiduciary duties and institutional profits. For example, ERISA imposes a duty of loyalty, requiring fiduciaries to act solely in the interests of plan participants and beneficiaries. When a university sponsors the plan and also profits when plan participants use university-affiliated providers, plaintiffs are likely to attack the structure as an inherent conflict.
While not every tiered network arrangement is automatically unlawful, courts may closely scrutinize the process that universities use to develop and manage such a plan. To meet the fiduciary duties of loyalty and prudence, a university may need to demonstrate objective criteria for tier assignments, the placement of affiliated providers for reasons other than a pure profit motive, and a mechanism to address any conflicts. The decision-making process must involve an objective assessment of cost, access, quality, and alternatives. Universities also must document regular monitoring of the arrangement over time.
Claims Based on MHPAEA Violation Liability
Tiered network arrangements also may be susceptible to claims under the Mental Health Parity and Addiction Equity Act (MHPAEA). In some cases, network tiers may operate as nonquantitative treatment limitations (NQTLs). For example, if a plan offers materially different or reduced access to preferred mental health providers compared to preferred medical and surgical providers, a parity issue under the MHPAEA may exist.
Recent litigation has based claims on the adequacy of network providers, mental health access, pricing, surprise billing, and the role of pharmacy benefit managers. While the tiered network arrangement may be lawful, management of the plan may not be without documented evidence of transparency, accessibility for plan participants, and regular, appropriate assessments. Steering plan participants toward affiliated providers is likely to subject these types of plans to greater scrutiny by courts, particularly regarding disclosures and the prioritization of interests.
HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 470-571-1007.
